How to increase your company’s value before a sale

After a difficult few years for both buyers and sellers, the mergers and acquisitions (M&A) market is starting to pick back up. But don’t expect it to mirror the last M&A boom, which peaked in 2021. Back then, cheap money resulted in multiple bidders on a sale, causing valuations to skyrocket even if fundamentals didn’t match. In today’s environment, as interest rates retreat, inflation eases and the odds of a hard landing dissipate, fewer bidders are conducting more exhaustive due diligence and ultimately paying prices more in line with traditional valuations.

Those who want to sell their business in the next couple of years will need to take a different approach than those who sold a few years ago, when buying frenzies would drive up bid multiples. Now, those who do have a target price they would like to achieve will have to work for it by taking action to demonstrate sustainable revenues and margin growth now to be ready to sell when the market picks back up.

Readying a business for sale

As buyers become more discerning, what they’re looking for in a potential business has evolved. At a high level, sellers must find ways to demonstrate any potential value waiting to be unlocked. Buyers will pay more for growth plans that are already underway or can readily be implemented, though there’s a better chance of receiving a higher multiple if a strategy is already showing success on the balance sheet.

When thinking of how to boost value, which is usually based on how much profit a company can generate, there are four key areas to consider.

Recurring revenue: Buyers will pay more for revenue they can rely on. If you do more project-based work, think of ways to create a monthly or annual payment model.
Pricing increases: Acquirers will spend more if they see a path for price increases. While demand could dip as prices rise, buyers are less likely to balk if you can demonstrate customer stickiness and value pricing.
Reduction in costs: Cutting costs doesn’t mean slashing headcount – if anything, buyers want to retain the talent that’s made a business a success. Instead, buyers want to see measures that are helping to reduce the cost of goods sold through such things as disciplined procurement processes or lower manufacturing expenses.
Consolidating back office: Lowering back-office expenses is important, too. This also involves streamlining back office functions under one roof instead of across multiple offices or consolidating IT applications, systems and solutions.

Boosting valuations

There are other more specific areas driving buyer interest that sellers will want to pay attention to if they hope to increase valuations. These include:

Decarbonization
Many large companies and private equity funds have pledged to reach net zero carbon emissions by 2050. Because of that, many now want the companies they purchase to be on a path to decarbonization. Sellers must be prepared to offer a detailed plan on how they’re getting to net zero and show progress against the plan, with capital expenditures fully baked into the financials to give buyers certainty about future costs. In some cases, experienced buyers will prefer to purchase a carbon-emitting company and clean it up themselves, as they can often reduce emissions faster and more cost-effectively.
Data
In our data-rich world, buyers often put a premium on company information. Purchasers want to see if the seller’s data provides a sufficient barrier to entry or if an up-and-coming business could use its own data and analytics to disrupt a business model. In some cases, buyers will pay for the inherent existing value of the data, for example, a large media company purchased a leading Canadian newspaper, in part for the publication’s extensive information on mutual funds. Most commonly, however, buyers want to see novel ways to use data to generate value. A Pension Plan company, for example, now owns a stake in a toll highway partly because it saw how detailed driver data could inform new pricing models that lead to greater profitability.
IPO readiness
The initial public offering (IPO) market has also struggled over the last couple of years for some of the same reasons why M&A has slowed. As fixed-income rates decline, equities could become more attractive again, resulting in renewed interest in IPOs. Buyers are increasingly interested in owning companies that can list on an exchange in the near future, providing investors an exit. Doing some work to get your company closer to a listing could help increase value, depending on the profile of your buyer pool.

Avoid sales process disruptions

Knowing how to increase business value and actually doing it are two very different things. Boosting revenues, working on decarbonization plans or getting a business IPO ready often takes a lot of hard, painstaking work that can make it difficult to focus on the day-to-day running of a company. In fact, our analysis has found that in 90% of cases, revenues decline and expenses increase during the sale process because executives and boards become so focused on trying to boost value or close a sale and take their eye off the underlying operations generating the revenue.

To do this right, any process you undertake to increase value should be done in confidence. If employees or customers know you’re preparing for a sale, they could get anxious. As well, because getting ready for a sale can often consume the C-suite’s focus, the CFO is usually the one responsible for internal preparations, leaving the head of operations, HR, IT and others in leadership to keep the business running smoothly.

Once you engage buyers, everyone can get drawn into fielding requests for information. But by carefully prepping for the sale up front, you can minimize distractions and keep financial performance high, as well as help ensure the actual sale window is as narrow as possible.

When to bring in outside help

It can also help to bring in third-party advisors to assist with running the company’s operations, while others in the C-suite help prepare the sale of a business. In that case, when the buyer starts asking for documentation or meetings with executives, the advisor can keep the business operating. On the other side, an advisor can also help with the sale of a business, bringing to the table their best practices, battle-tested playbooks and a treasure trove of data to model various scenarios and ultimately increase the chance of success and protect against value erosion.

As the M&A market ramps up again, now’s the time to focus on adding value to your business so that you can sell for a higher price. Buyers are scrutinizing companies more than ever before and without several bidders increasing prices, your business will need to put in the work to boost multiples itself. With the right preparation, though, your company can raise its value without eroding financial performance. Start laying the groundwork today.

How we can help

KPMG's Deal Advisory team offers comprehensive transaction to transformation services. Backed by deep sector knowledge and data-driven strategies, we can help you create more value through all phases of M&A transactions and beyond, enabling performance transformations that deliver tangible financial impact.